Asahi Intecc (TSE:7747) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Asahi Intecc Co., Ltd. (TSE:7747) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Asahi Intecc's Debt?

As you can see below, Asahi Intecc had JP¥3.30b of debt at March 2025, down from JP¥8.37b a year prior. But on the other hand it also has JP¥45.9b in cash, leading to a JP¥42.6b net cash position.

How Strong Is Asahi Intecc's Balance Sheet?

According to the last reported balance sheet, Asahi Intecc had liabilities of JP¥20.0b due within 12 months, and liabilities of JP¥10.7b due beyond 12 months. Offsetting this, it had JP¥45.9b in cash and JP¥18.7b in receivables that were due within 12 months. So it can boast JP¥34.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Asahi Intecc could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Asahi Intecc has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Asahi Intecc

In addition to that, we're happy to report that Asahi Intecc has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Asahi Intecc can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Asahi Intecc has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Asahi Intecc recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Asahi Intecc has JP¥42.6b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 33% over the last year. So is Asahi Intecc's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Asahi Intecc you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.